The East is Cracking Down on E-Money, Too

By Leonid Bershidsky -
Aug 12, 2013

Governments are finally coming to terms with the reality of e-money, and the U.S. court case against an alleged Bitcoin Ponzi scheme is only one example. Russia and Ukraine are also struggling with Internet currency controversies.

On Aug. 12, the Russian Prosecutor General's Office said in a statement that it had found that Alexei Navalny, an opponent of President Vladimir Putin now running for mayor of Moscow, received foreign funding for his election campaign. "It has been established that 300 foreign persons and companies, as well as anonymous donors from 46 countries and 347 IP addresses, used the electronic payment system Yandex Money" to transfer funds for Navalny's campaign, according to the statement.

Yandex Money is as law-abiding as electronic-payment systems come: It is part of Yandex, one of the biggest Russian Internet companies with a market cap of almost $11 billion, and trouble with the authorities is the last thing the company wants. It reacted quickly to the prosecutors' statement. Yandex Money spokesman Asya Melkumova explained that the foreign IP addresses of Navalny's would-be donors only meant that they were physically outside Russia when the transfers were made. As the payments were made in Russian rubles, however, the donors were Russian residents.

"If, instead of requesting user data, the Prosecutor General's Office draws conclusions from IP addresses during the holiday season, it means that people there don't understand a thing about technology or the difference between IP address and citizenship," popular blogger Anton Nosik told the Web magazine Cityboom.

The prosecutors aren't likely to recognize their mistake, apologize and go away. "They will start chewing over this on TV all day, hoping to sway retirees who believe an IP address is something akin to a spy radio transmitter," Navalny predicted in his blog. Navalny is currently out on bail as he waits to appeal a transparently politicized fraud conviction. The foreign-financing allegations could be used to strike him off the ballot if the Kremlin deems it necessary.

The allegations against Navalny's campaign funding may be disingenuous, yet electronic-payment systems do operate in a financial twilight zone. Yandex Money, for all its efforts at compliance, allows users to open anonymous accounts. By Russian law, transfers from these accounts are limited to about $1,300 per month and $500 per day, yet a money launderer could open and use multiple accounts. Yandex Money isn't popular with international cyber-criminals because it is a ruble-only service and they prefer harder currencies. Yet some Russian hackers involved in illegal activities do use Yandex as well as other systems, such as Bitcoin and Webmoney.

The latter is a Moscow-based company, which has created a number of electronic currencies exchangeable one-to-one for money issued by states, including rubles, U.S. dollars and Ukrainian hryvnia. Webmoney has attracted people involved in shadowy online commerce since its launch in 1998. "I loved using it back in my carding days," wrote one self-professed credit-card fraudster in a forum thread now only available in the Google cache. "It is easy to fund, anonymous, stable, it is based in Russia."

Webmoney, which claims to have 22 million users, has done its best to clean up its image, introducing several levels of identification and severely restricting activity for users who don't provide proof of identity. That wasn't enough for the Ukrainian authorities, which closed down the local Webmoney operation in June. More than $8 million in users' accounts was blocked on the grounds that Webmoney didn't have permission from the central bank to operate a money-transfer service. "The system was used by e-commerce sites, telecom providers and private individuals trying to conceal illegal financial operations," the Ukrainian Ministry of Revenues said in a statement. Now, Ukrainian users can use their frozen Webmoney accounts to buy goods or take money out, but they cannot add to the accounts.

Webmoney says it doesn't move money but "title units," which are used to keep a record of property rights to valuables. Governments and courts have tolerated such opaque language for years, but the window of opportunity for these payment systems appears to be closing. In the U.S. Ponzi scheme case, a judge has ruled to recognize Bitcoin as a form of money. The Ukrainian authorities didn't bother with a court order to make the same judgment about Webmoney.

Bitcoin, Webmoney and Yandex Money differ significantly: The first is decentralized, its emission algorithmically limited; the second is its own central bank; and the third uses real fiat currency. Governments, however, are suspicious of all systems that allow people to move money anonymously. The dangers are clear to bureaucrats in Moscow, Washington and Kiev alike, and they are all bearing down on e-money systems to regulate them as stringently as banks. Paradoxically, whereas banks have retained some shred of client privacy, the newer online services are likely to make fuller disclosures precisely because they aren't financial institutions and want to avoid attracting scrutiny. To survive in the newly intolerant environment, these e-money services will have to become completely transparent to intelligence services, prosecutors and tax inspectors. So if your goal is to hide money, use them at your own risk.

(Leonid Bershidsky, an editor and novelist, is Moscow correspondent for World View. Follow him on Twitter.)